German Notes Rise Fourth Day on ECB Rate Bets, Production Slump

German government notes advanced for a fourth day amid speculation the European Central Bank will cut interest rates and after a report showed the country’s industrial production unexpectedly declined in October.

Finnish and Dutch two-year yields fell below zero and Germany’s approached a record low as three officials with knowledge of ECB deliberations said a majority of policy makers were open to a rate cut. Greece’s bond yields fell to the least since the nation’s debt was restructured in March on the last day of trading before holders submit offers for a state buyback of the securities. German 10-year bund yields rose from a four- month low after a U.S. labor market report.

“The outlook the ECB gave yesterday scared some market participants, and we’ve seen another leg lower in bund yields,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Yields could stay low for the next few weeks.”

German two-year note yields dropped three basis points, or 0.03 percentage point, to minus 0.077 percent as of 4:29 p.m. London time. The zero percent security maturing in December 2014 rose 0.06, or 60 euro cents per 1,000-euro ($1,294) face amount, to 100.155. The rate fell to minus 0.085 percent, the least since Aug. 2, when it reached an all-time low of minus 0.097 percent. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

German 10-year yields were little changed at 1.30 percent after falling to 1.28 percent, the lowest since Aug. 3. U.S. payrolls rose more than analysts estimated in November and the jobless rate fell, reports today showed.

German Output

Production in Europe’s largest economy fell 2.6 percent from September, when it declined 1.3 percent, the Economy Ministry in Berlin said today. Economists forecast that output would remain unchanged, according to the median of 42 estimates in a Bloomberg News survey.

Germany’s central bank sliced more than 1 percentage point off its forecast for economic expansion in Europe’s largest economy next year after the sovereign debt crisis pushed the euro area into recession and global growth slowed.

The Bundesbank cut its 2013 projection to 0.4 percent from the 1.6 percent predicted in June and said the economy, Europe’s largest, will grow 0.7 percent this year, down from its previous forecast of 1 percent. The economy will contract in the fourth quarter and stagnate in the first, the Frankfurt-based central bank said. It will recover to expand 1.9 percent in 2014, according to the new forecasts.

Growth Forecasts

The ECB lowered growth forecasts for the euro area yesterday at a meeting where policy makers kept the main refinancing rate at a record-low 0.75 percent. The decision was in line with the median estimate of 61 analysts in a Bloomberg survey.

Rates were kept on hold because of concern that a cut might send a negative signal in conjunction with downward revisions to the ECB’s growth and inflation forecasts, the three officials said on condition of anonymity. Lowering rates will be considered again next month, one of the officials said.

The yields on Dutch two-year notes dropped four basis points to minus 0.022 percent, the lowest since Aug. 10. Finland’s two-year yield plunged as much as four basis points to a record-low minus 0.064 percent.

Bond Volatility

Volatility on Irish bonds was the highest in euro-region markets, followed by those of France and Greece, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities, and credit default swaps.

Irish bonds maturing in 2020 fell for a fourth day, with the yield climbing five basis points to 4.57 percent.

The yield on Greek 10-year bonds dropped 54 basis points to 14.42 percent, with the price at 39.97 percent of face value.

Italian bonds were set for their first weekly decline in four after former Premier Silvio Berlusconi threatened yesterday to withdraw his party’s support for Prime Minister Mario Monti’s coalition government.

Monti said he plans to keep his government intact as Berlusconi cultivates an anti-austerity message before the general election due next year.

Italy’s 10-year yields have dropped from a euro-era record 7.48 percent on Nov. 9, 2011. The rate slid three basis points today to 4.54 percent, leaving it four basis points higher since Nov. 30.

German bonds returned 4.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 4.7 percent and Italy’s bonds earned 20 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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